European Bank Deposits Once Again Declining

As everyone already knows, the LTRO from the ECB this September was a complete failure.

So that means liquidity for the European banks has not improved a lot. They expected that European banks would take credit from the ECB of €385 billion, but instead it became €82.6 billion across 255 counterparties. Excess liquidity has jumped up a bit from €77 billion to €122 billion, but it's still not enough to be safe in my opinion. I wrote about that here.

This is also being confirmed in the deposits at the European banks. The latest number from August 2014 showed a decline in deposits.

And so excess liquidity keeps drying up. Let's wait till the second LTRO in December and see how that goes. They can't wait any longer as Europe is now entering a deflationary cycle, probably along with a lot of unemployment claims.

Spain is following Greece in its path to bankruptcy

The situation in Spain is looking worse every day. I believe Spain is following the path of Greece into bankruptcy.

Let's take a look at the Spanish bond yields. At the end of 2011 we got the massive ECB bailout package named Long Term Refinancing Operation (LTRO). This relieved the bonds of certain peripheral governments like Italy, Greece and Spain. Lately though, with many Spanish regions on the verge of bankruptcy, Spanish bond yields are rising again. Let's take a quick look at these.

The best way to look at stress in the bond yields is to look at the bond spread between long term maturities (Chart 1) versus short term maturities (Chart 2). If the spread narrows, it means there is stress, because the shorter maturity is about to rise above the longer maturity bond yield. Normally in a healthy economy, longer maturities always have higher yields than shorter maturities. If this is not the case, this means that defaults are looming (see Greece bond yields: shorter maturities have higher yields than longer maturities).

To read the analysis go HERE.

Chart 1: Spanish 10 year bonds

Chart 2: Spanish 2 year bonds

ECB Rate Cut and its Effect on Euribor

On Thursday 5 July 2012, the ECB cut its main refinancing rate to 0.75% and its deposit rates to 0%. After LTRO I and LTRO II, we have another stimulus to supply credit to the markets.

In my previous article on LTRO I, I noted that the Euribor was manipulated lower to make it easy to lend (Chart 1). 

Chart 1: 3 Month Euribor

But it wasn't working out for the markets, because all the money was kept at the ECB deposit facility (Chart 2).

Chart 2: ECB Deposit Facility

Then, we got the interest rate cut of the ECB, and that lowered the Euribor another step from 0.64% to 0.55% as witnessed on Chart 1 (see the little spike downwards).

So what does all this mean for you? Read the analysis here.

ECB's LTRO I and LTRO II didn't work

On Zerohedge, the article of the ECB deposit facility sparked my attention. Apparently, banks are depositing their money into the ECB at an alarming rate (Chart 1).

Since the crisis of 2008, this deposit facility had risen a lot (250 billion euro), but has only recently skyrocketed to more than 800 billion euro.

This deposit facility at the ECB is a macro-economic indicator of market tension residing at the European banks. It is seen as a "safe haven" during economic turmoil in Europe. The higher this ECB deposit facility rises, the more banks favour the safety of the ECB deposit over higher returns in the interbank market. It shows that banks aren't lending to each other and also shows that appetite for European government bonds is declining.

Even though banks borrowed 489 billion euro (LTRO I) and 529.5 billion euros (LTRO II) in loans (at 1% lending rate) from the ECB, a lot of that money just went back into the ECB deposit facility at 0.25%. This means that banks are actually opting to lose money due to fear of a eurozone break-up.

To read the full analysis on this matter go to: The European Central Bank's LTRO Isn't Working Out.